Will Natural Gas Be The Next To Rally?

It’s hard to get overly excited about natural gas when inventories are 22% above their five-year average and 31% above last year’s levels, and the gap between current inventories and historical averages has been rising steadily throughout the year. However, while the fundamentals aren’t necessarily attractive, the historical relationship between the price of natural gas and oil is nearing record extremes.

With oil nearing 70 and natural gas below four, the current ratio between the two commodities is now over 18. Following prior periods when the ratio went above 18, while natural gas hasn’t always rallied, it has always outperformed oil. Additionally, as we near the end of the second quarter, natural gas is entering what has historically been its best quarter of the year. As shown in the chart below, the commodity's average return (using the front month futures contract) during the third quarter of the year has been 12.95% with positive returns 63% of the time.

Inflation and Oil Prices: Our Next Move

Inflation and Oil Prices: Our Next Move

Always follow the oil market closely, because it will impact the fundamentals of many businesses — including those we are selling short.

Drivers in the U.S. no longer determine the global price of oil. So oil prices can remain high despite a weak labor market — as we saw in the 1970s. If this winds up being the case, it’s bad news for owners of financial and consumer stocks and good news for owners of energy stocks.

Andy Xie, formerly of Morgan Stanley, is a great strategist who, while most other economists sought to justify the housing bubble, warned of the unsustainable U.S./China vendor finance trade model that grew so rapidly between 2001-2008. He recently wrote an article for Caijing magazine on the factors that might drive oil prices in the future. He writes:

Conventional wisdom says inflation will not occur in a weak economy: The capacity utilization rate is low in a weak economy and, hence, businesses cannot raise prices. This one-dimensional thinking does not apply when there are structural imbalances. Bottlenecks could first appear in a few areas. Excess liquidity tends to flow toward shortages, and prices in those target areas could surge, raising inflation expectations and triggering general inflation. Another possibility is that expectations alone would be sufficient to bring about general inflation.

Oil is the most likely commodity to lead an inflationary trend. Its price has doubled from a March low, despite declining demand. The driving force behind higher oil prices is liquidity. Financial markets are so developed now that retail investors can respond to inflation fears by buying exchange-traded funds individually or in baskets of commodities.

Oil is uniquely suited as an inflation-hedging device. Its supply response is very low. More than 80% of global oil reserves are held by sovereign governments that don’t respond to rising prices by producing more. Indeed, once their budgetary needs are met, high prices may decrease their desire to increase production. Neither does demand fall quickly against rising prices. Oil is essential for routine economic activities, and its reduced consumption has a large multiplier effect. As its price sensitivities are low on demand and supply sides, it is uniquely suited to absorb excess liquidity and reflect inflation expectations ahead of other commodities.

The Chinese government is sending strong signals to its banking system that it wants lending to slow down from its blistering pace. It remains to be seen whether this will actually result in a contraction in Chinese bank lending or whether lending may just shift from one sector to another. If I had to guess, I think oil prices will have a sharp correction this fall as Chinese stockpiling slows down and as oil and refined product inventories remain more than adequate to meet sluggish U.S. demand.



But this correction will offer trading and investing opportunities on the long side. As you see in the two charts below, the linkage between oil prices and U.S. inventories during the entire post-2002 bull market was not as close as you’d expect:




Here’s why I think a correction in oil prices will offer a buying opportunity: Inflation fears and stabilizing in global demand are not the only reasons the price of oil has doubled from its lows. Oil prices are up because the marginal cost of new supply — including from Canadian tar sands and from under thousands of feet below the ocean surface — is so high.

To Andy Xie’s important point about oil as an inflation hedge, I’d add that OPEC planners understand that they are trading a scarce, extremely energy-dense, nonrenewable, depleting asset for paper money. They also are beginning to grasp that indebted oil importers plan to ease their debt burdens by employing the heavy guns in the inflation arsenal: “quantitative easing.” So their portfolio preferences will shift away from government paper and toward retaining scarce oil in the ground for future revenues. In other words, “Why should we trade oil for dollars now if we receive higher prices five years down the road?”

This is just one of the many intricacies governing how the global oil market operates, and it helps explain why those who are perpetually bearish on oil prices waited for years and years for a rational, free-market supply response to higher prices that never arrived in force. That is, until last fall’s panic brought demand far enough below supply that prices crashed. Now, the conventional wisdom says that several million barrels per day of spare OPEC capacity will keep a lid on prices for years. We may discover by next year just how quickly this alleged spare capacity will come back online, and at what price.

The question then becomes why should national oil companies rush into the risks of making the enormous capital investments necessary to maintain production — let alone grow production. Nancy Pelosi and Ben Bernanke are not promoting policies to make energy cheaper; in fact, their playbooks virtually ensure the opposite. Privately owned exploration and production (E&P) companies that take smart risks will be the ones that deliver more supply at lower prices to help ease supply constraints.

Now, when you consider how the U.S. economy currently functions, you come to understand that rising energy prices induce enormous headaches for practically every consumer and business. Call rising energy prices a “deflationary force in the real economy” if you like. The point here is the irony of the situation: The Fed and Treasury are trying to reinflate a deleveraging private economy, and much policy could wind up accelerating the deleveraging process by adding pressure to the prices of nondiscretionary items like food and energy. After all, these are both global commodities, and capacity in these sectors is tighter than most market participants realize.

Bottom line: There is no easy, painless way out of a credit-financed asset bubble that artificially pumped up consumption. This artificial growth in consumption prompted entrepreneurs to misallocate resources into unproductive sectors that were temporarily pumped up by what looked like sustainable demand. Meanwhile, there are many sectors, including oil and gas, that have been underinvesting relative to the long-term global demand for mobile, modern lifestyles.

Sure, oil prices could correct sharply this fall as traders panic about a temporary glut in aboveground supply at storage terminals. But to use manufacturing terms, it’s the “raw material” and “work in process” inventory that really matters. That type of inventory, sitting higher up in the supply chain, is much tighter than the “finished goods” inventory sitting in storage terminals like Cushing, Okla. I expect we’ll see this tightness reflected in prices by 2010, even if demand remains stagnant.

Production capacity in oil and gas looks plentiful right now, but capacity naturally falls every year, and requires hundreds of billions in global capital expenditures just to keep supply steady. According to an exhaustive analysis published by Neil McMahon of Bernstein Research on Aug. 10, non-OPEC oil supply will keep declining in the coming years, despite healthy levels of investment. Outside of OPEC (where information regarding capacity and investment plans is murky at best) explorers are targeting smaller formations, as production from giant, decades-old fields declines. McMahon writes:

In the long term, we believe that oil prices will increase in line with the marginal cost of supply, which continues to rise as the complexity of new wells increases and production rates from established fields decline. Basically, not enough significant discoveries have been made in non-OPEC countries in recent years to help the supply situation before 2015. Additionally, flow rates from the few discoveries that have been made do not give rise to much optimism and, as in the past, the drop in absolute oil demand will be offset by rapidly declining mature field production with the recent fall in industry spending. So the continued decline in non-OPEC supply will provide an additional support for prices, as it feeds through to OPEC spare capacity. We believe that 2010 will see the next inflexion point in prices, as OPEC spare capacity begins to decline and demand shows positive growth for the first time in a number of years and we expect to see oil average $80 in 2010, $103 in 2011, $111 in 2012, and increasing to $140 in 2015.

You can imagine what this type of price trajectory will do to U.S. businesses that rely on cheap fuel, and have no ability to push through price increases. Considering how many more trillions of U.S. dollars will be floating around the global economy in 2015, and savers’ willingness hoard them declines, $140 per barrel might be conservative.

Global oil production capacity, rather than demand, will eventually drive prices. Bernstein projects 2020 oil production capacity will be about the same as it is now: 85 million barrels per day. We must consider net exports too; the global trade flows of this oil will certainly change. Over time, more tanker shipments will be diverted away from the U.S. and Europe and head to Asia. Also, in recent years, OPEC countries have been consuming more of their own product at home. Plus, the Chinese government has shown that it will beat any and all comers in the competition to secure supply under long-term contracts.

Regards,
Dan Amoss

Stock Market Commentary

Stock Market: Shake and Bake.

Major stock price indexes broke down below the lows of the previous 3 trading days before whipping around to close up on the day. Sell stops below the 3-day range were elected. New trend-following shorts were lured in--and squeezed. I expect that everybody will be blaming high-frequency trading programs for the whipsaw. We’ve seen a lot of this kind of action, one- or two-day shakeouts, since the March lows.

Financial Stock Sector Relative Strength Ratio (XLF/SPY) broke out to a new 9-month high on 8/27/09, confirming a cyclical uptrend.

NASDAQ Composite Relative Strength Ratio compared to the versus the S&P 500 has turned down since 7/23/09 and broke down below the lows of the previous 11 weeks on 8/27/09.

The U.S. dollar price fell back to the lower end of its range. Still, USD appears to be stabilizing since making an 11-month low on 8/5/09.

Investors Intelligence survey of stock market newsletter advisors shows the highest ratio of Bulls to Bears in 22 months, since 10/17/07, now at 2.61 Bulls for every Bear.

Spotlight on event stocks: Here is a stock screen I designed to pick out potential event stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are revealed to be deal stocks, sooner or later, or are the subject of some other extraordinary events, positive or negative.

Bullish Stocks: Rising Price and Rising Volume
% Price Change, Symbol, Name

46.34% , ABK , AMBAC FINL GRP
17.50% , MBI , MBIA
26.93% , AIG , AMER INTL GROUP
22.83% , CIT , CIT GROUP
8.36% , BA , BOEING
6.71% , DELL , DELL
9.46% , GNW , GENWORTH FINANCIAL (NYSE:GNW)
8.35% , ATI , ALLEGHENY TECH
1.14% , ADRU , Europe 100 BLDRS, ADRU
9.07% , C , CITIGROUP
0.53% , SWH , Software H, SWH
1.34% , KG , KING PHARM
0.89% , EWI , Italy Index, EWI
4.31% , HMA , HEALTH MGMT STK A
1.82% , PPA , Aerospace & Defense, PPA
0.82% , EWQ , France Index, EWQ
1.78% , TBH , Telebras HOLDRS, TBH
0.27% , IAH , Internet Architecture H, IAH
2.88% , MCO , MOODYS CORP
2.70% , PPG , PPG INDUSTRIES
3.42% , COL , ROCKWELL COLLINS
3.57% , ETFC.O , E*TRADE FINANCIAL
3.60% , NTAP , NETWK APPLIANCE
0.33% , EWG , Germany Index, EWG
0.41% , JKH , MidCap Growth iS M, JKH
1.13% , EWO , Austria Index, EWO
2.13% , EWA , Australia Index, EWA
1.20% , EWP , Spain Index, EWP
0.35% , VO , MidCap VIPERs, VO
2.27% , WOR , WORTHINGTON INDS
2.65% , ACE , ACE
2.52% , GR , GOODRICH CORP
0.99% , CPB , CAMPBELL SOUP
3.73% , WHR , WHIRLPOOL
0.32% , ISI , LargeCap Blend S&P 1500 iS, ISI
2.06% , EZA , South Africa Index, EZA
10.34% , FRE , FREDDIE MAC
2.81% , KEY , KEYCORP
1.60% , MRVL , MARVELL TECHNOLOGY
4.19% , AMD , ADV MICRO DEV

Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-6.24% , CAR , Avis Budget Group, Inc. (CAR)
-2.20% , PGF , Financial Preferred, PGF
-2.36% , JNS , JANUS CAPITAL
-0.33% , JKK , Growth SmallCap iS M, JKK
-0.34% , UTH , Utilities H, UTH
-2.47% , AM , AMER GREETINGS STK A
-1.60% , RIMM , RESEARCH IN MOTION LTD
-0.84% , NOVL , NOVELL
-1.60% , RFMD , RF Micro Devices Inc
-1.11% , MWV , MEADWESTVACO
-1.39% , DOW , DOW CHEMICAL
-1.38% , EOG , EOG RESOURCES
-1.84% , EP , EL PASO
-1.87% , MOT , MOTOROLA
-1.41% , XTO , XTO ENERGY INC
-0.51% , HYG , Bond High-Yield Corporate, HYG
-1.04% , ALTR , ALTERA
-0.93% , NUE , NUCOR
-0.84% , WAT , WATERS
-2.36% , PTEN , Patterson-UTI Energy Inc
-0.25% , ILF , Latin Am 40, ILF
-1.12% , ACS , AFFILIATED COMPUTER
-0.42% , IYT , Transportation Av DJ, IYT
-1.69% , NIHD , NII Holdings, Inc.
-0.26% , PFM , Dividend Achievers PS, PFM
-0.69% , MU , MICRON TECH
-1.43% , PHM , PULTE HOMES
-0.82% , UIS , UNISYS
-0.33% , EWH , Hong Kong Index, EWH
-1.77% , DLX , DELUXE
-0.60% , PXE , Energy Exploration & Prod, PXE
-0.46% , LQD , Bond, Corp, LQD
-1.47% , CCL , CARNIVAL STK A
-1.22% , WMB , WILLIAMS
-0.75% , RDC , ROWAN COMPANIES
-1.08% , WMT , WAL MART STORES
-0.68% , CSC , COMPUTER SCIENCE
-0.38% , VIA , VIACOM INC. (New)
-0.27% , IEF , Bond, 10 Year Treasury, IEF
-0.28% , EWY , South Korea Index, EWY

9 major U.S. stock sectors ranked in order of long-term relative strength:

Consumer Discretionary (XLY) Neutral, Market Weight. The Relative Strength Ratio (XLY/SPY) has made no progress since 4/30/09. XLY was strong from 11/19/08 to 4/30/09, and that past strength accounts for XLY’s high ranking here. Long term, XLY/SPY has trended downward since 1/5/05.

Technology (XLK) Neutral, Market Weight. The Relative Strength Ratio (XLK/SPY) turned down after 7/22/09. XLK was so strong from 12/31/08 to 7/22/09 that it still ranks high in this long-term relative strength ranking. XLK/SPY rose to its highest level in 7 years on 7/22/09, confirming a long-term uptrend in effect since 9/30/02.

Health Care (XLV) Neutral, Market Weight. The Relative Strength Ratio (XLV/SPY) has flattened out in recent months. XLV/SPY rose strongly from 5/15/08 to 2/23/09, resulting in the relatively high ranking here.

Financial (XLF) Neutral, Market Weight. The Relative Strength Ratio (XLF/SPY) broke out to a new 9-month high on 8/27/09, confirming a cyclical uptrend. XLF has outperformed since 3/6/09. Longer term, XLF/SPY may still be in a secular Bear trend since its major top on 3/23/04.

Materials (XLB) Neutral, Market Weight. The Relative Strength Ratio (XLB/SPY) broke down below the lows of the previous 4 weeks on 8/26/09, thereby confirming a short-term downside correction. Nevertheless, XLB/SPY is still in an uptrend since its low on 12/5/08.

Consumer Staples (XLP) Neutral, Market Weight. The Relative Strength Ratio (XLP/SPY) underperformed moderately since 11/20/08. Longer term, XLP/SPY is still holding a 2-year uptrend line.

Industrial (XLI) Bearish, Underweight. The Relative Strength Ratio (XLI/SPY) in recent months appears to be consolidating previous massive losses. XLI/SPY fell long and hard from 3/31/08 to 3/6/09.

Utilities (XLU) Bearish, Underweight. The Relative Strength Ratio (XLU/SPY) has stabilized and has been about flat since 6/9/09. XLU/SPY underperformed from 11/21/08 to 6/9/09.

Energy (XLE) Bearish, Underweight. The Relative Strength Ratio (XLE/SPY) has been weak since 6/11/09. Longer term, XLE/SPY fell to a 10-month low on 8/17/09, to confirm a Bearish cycle phase in force since it peaked on 7/1/08.

Emerging Markets Stocks ETF (EEM) Relative Strength Ratio (EEM/SPY) appears to be in a short-term downtrend since 8/3/09 but still in a major long-term uptrend since 10/24/08. Absolute price has been in a rising trend since 11/20/08.

Foreign Stocks ETF (EFA) Relative Strength Ratio (EFA/SPY) appears to be firming up since 7/14/09. EFA outperformed from 10/27/08 to 5/22/09, and that uptrend could resume. EFA is the ETF representing the EAFE, the international developed country stock markets, excluding the U.S. and Canada.

NASDAQ Composite Relative Strength Ratio compared to the versus the S&P 500 has turned down since 7/23/09 and broke down below the lows of the previous 11 weeks on 8/27/09.

Growth Stock/Value Stock Relative Strength Ratio (IWF/IWD) broke down below previous 3-month lows on 8/26/09. Long term, the RS Ratio has been in an uptrend since 8/8/06, indicating major trend strength.

Russell 1000 Value ETF Relative Strength Ratio (IWD/SPY) has firmed up short-term, since making a low on 7/8/09. Long term, the IWD RS Ratio remains in a Bearish Major Trend, underperforming the SPY since 3/22/07.

The S&P 500 equally weighted index rose a new high relative to the S&P 500 capitalization weighted index on 8/13/09, confirming a major uptrend in effect since 11/19/08.

The Largest Cap S&P 100 / S&P 500 Relative Strength Ratio (OEX/SPX) has stabilized since making a low on 8/7/09. The ratio had been in a downtrend from 11/20/08 to 8/7/09, indicating that the largest capitalization stocks were lagging the broader market.

The Small Cap/Large Cap Relative Strength Ratio (IWM/SPY) has been in a rising trend since 3/9/09. The ratio made a 9-month high on 8/4/09, which indicated a relative uptrend for the longer term for Small Cap stocks.

The Mid Cap/Large Cap Relative Strength Ratio (MDY/SPY) broke down below 2-week lows on 8/17/09, confirming a downtrend for the short term. Longer term, the ratio was in an uptrend from 11/21/08 to 8/17/09, and that uptrend could resume.

Crude Oil nearest futures contract price broke down below the lows of the previous 5 trading days before reversing to close higher than the 2 previous closes. Oil held a 6-week uptrend line, which is bullish. The cyclical, intermediate-term trend still appears bullish.

The Energy stock sector has underperformed Crude Oil since 2/18/09. The XLE to Crude Oil Ratio broke down to a new 7-month low on 6/29/09.

Gold nearest futures contract price has been confined to a choppy trading range since 8/6/09. Gold appears to have some resistance at previous highs of 957.6 and 960.1. For support, watch previous lows at 931.5, 925.2 and 904.8, based on the nearest futures contract. Intermediate term, Gold appears to be in a triangle consolidation since 2/16/09. Longer term, Gold has been consolidating since making an all-time high at 1,033.9 on 3/17/08. Probabilities appear to favor an upside breakout--eventually.

Gold Mining Stocks ETF (GDX) Relative Strength Ratio (relative to Gold bullion) has been consolidating gains since peaking on 6/2/09. The ratio was in an uptrend from 10/27/08 to 6/2/09, and that uptrend could resume.

Silver/Gold ratio peaked on 6/2/09 and remains lower, suggesting some small diminishment of confidence in world economic recovery.

Copper nearest futures contract price has been confined to a choppy trading range since 8/14/09. Longer term, Copper has been in a 9-month uptrend since 12/08, and that uptrend could resume.

U.S. Treasury Bond nearest futures contract price fell after encountering resistance at 121.07 to 121.12. The Bond broke out above the highs of the previous 6 weeks on 8/26/09, confirming the minor trend as Bullish. Intermediate term, Bonds still may be consolidating in a neutral trading range. On 8/7/09, Bonds found support at the upper end of the 112-115 zone of many previous reversal points (including both lows and highs).

Bond quality ratio (LQD/TLT) has been trending down since 8/7/09. Longer term, the ratio trended up from 12/19/08 to 8/7/09. LQD/TLT is iShares iBoxx $ Invest Grade Corp Bond ETF (LQD) price divided by 20+ Years US Treasury Bond ETF price (TLT).

The U.S. dollar nearest futures contract price fell back to the lower end of its range. Still, USD appears to be stabilizing since making an 11-month low on 8/5/09. Intermediate term, USD has lost downside momentum in August but still may be merely consolidating losses within a Bearish trend. Longer term, USD fell below 10-month lows on 8/5/09 and remains in a Bearish trend since its peak set on 3/4/09.

The Art of Contrary Thinking: The various surveys of investor sentiment are best considered as background factors. The majority of investors can be right for a long time before a major trend finally changes course. So, Contrary Thinking should be used with more precise market timing tools.

Advisory Service Sentiment: There were 51.6% Bulls versus 19.8% Bears as of 8/26/09, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio was 2.61, up from 2.09 the previous week. This 2.61 was the highest reading since 10/17/07. The ratio’s 39-year range is 0.28 to 17.51, the median is 1.43, and the mean is 1.73.

VIX Fear Index has been fluctuating sideways between 23 and 28 since 7/24/09, after falling from a peak of 80.86 set on 11/20/08. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

VXN Fear Index has been fluctuating sideways between 24 and 28 since 7/17/09, after falling from a peak of 80.64 set on 11/20/08. VXN measures NASDAQ Volatility using a method comparable to that used for VIX.

ISEE Call/Put Ratio rose to 1.33 on 8/27/09, still indicating neutral sentiment. The ratio’s 5-year mean is 1.43, median is 1.38, and its range is 0.51 to 3.16.

CBOE Put/Call Ratio rose to 0.64 on 8/26/09, indicating neutral sentiment. The ratio’s 5-year mean is 0.67, median is 0.65, and its range is 0.35 to 1.35.

Fundamentals: The 2003-2007 Bull Market was fed by abundant global liquidly, M&A, leveraged buyouts, corporate stock buybacks, and a net balance of positive earnings surprises. The unfolding fallout from the credit market crisis derailed that engine. Since the stock market low on 3/9/09, massive monetary and fiscal stimulation appears to have had an increasingly Bullish impact on investor sentiment.

The Dow Theory signaled a Primary Tide Bull Market on 7/23/09 when both the Dow-Jones Industrial Average the Dow-Jones Transportation Average closed above their May-June 2009 closing price highs. This reverses the previous signal: the two Averages signaled a Primary Tide Bear Market on 11/21/07, when both Averages closed below their closing price lows of August, 2007.

S&P 500 Cash Index Potential Resistance
1,576.09, high of 10/11/2007
1,552.76, high of 10/31/2007
1,523.57, high of 12/11/2007
1,498.85, high of 12/26/2007
1,440.24, high of 5/19/2008
1,406.32, high of 5/29/2008
1,381.50, Fibonacci 78.6% of 2007-2009 drop
1,366.59, high of 6/17/2008
1,335.63, high of 6/25/2008
1,313.15, high of 8/11/2008
1,274.42, high of 9/8/2008
1,255.09, high of 9/12/2008
1,238.807, Fibonacci 78.6% of 1,576.09 high
1,228.74, Fibonacci 61.8% of 2007-2009 drop
1,220.03, high of 9/25/2008
1,121.44, Fibonacci 50.0% of 2007-2009 drop
1,077.08, Fibonacci 61.8% of 2002-2007 upmove
1,044.31, high of 10/14/2008
1,037.75, high of 8/25/2008

S&P 500 Cash Index Potential Support
1,016.20, low of 8/27/2009
1,014.14, Fibonacci 38.2% of 2007-2009 drop
1009.06, low of 8/21/2009
1,007.78, Gann 37.5% of 2007-2009 drop
978.51, low of 8/17/2009
956.23, high of 6/11/2009
930.17, high of 5/8/2009
869.32, low of 7/8/2009
826.83, low of 4/21/2009
814.53, low of 4/7/2009
813.62, high of 4/1/2009
779.81, low of 3/30/2009
666.79, intraday low of 3/6/2009
665.23, Fibonacci 61.8% of 2002-2007 upmove
602.07, Fibonacci 38.2% of 1,576.09 high

Daily Rankings of Major ETFs, Ranked from Strongest to Weakest of the Day:
% Price Change, ETF Name, Symbol

2.36% Internet Infrastructure H, IIH
2.13% Australia Index, EWA
2.08% Oil, Crude, U.S. Oil Fund, USO
2.06% South Africa Index, EZA
1.82% Aerospace & Defense, PPA
1.76% Value S&P 500, RPV
1.64% Pacific ex-Japan, EPP
1.32% Euro STOXX 50, FEZ
1.20% Spain Index, EWP
1.16% Financials Global LargeCap Value, IXG
1.14% Europe 100 BLDRS, ADRU
1.13% Austria Index, EWO
1.13% Canada Index, EWC
1.12% Developed 100 BLDRS, ADRD
1.06% European VIPERs, VGK
1.04% Realty Cohen & Steers, ICF
1.03% Value LargeCap Fundamental RAFI 1000, PRF
1.03% Financial SPDR, XLF
1.03% Financial Services DJ, IYG
1.02% Switzerland Index, EWL
0.97% Value EAFE MSCI, EFV
0.97% REIT VIPERs, VNQ
0.97% Asia 50 BLDRS, ADRA
0.96% Singapore Index, EWS
0.96% Value MidCap iS M, JKI
0.94% 200% Short US T Bond, TBT
0.93% Financial DJ US, IYF
0.91% Industrial SPDR, XLI
0.89% Italy Index, EWI
0.89% REIT Wilshire, RWR
0.87% EMU Europe Index, EZU
0.84% Commodity Tracking, DBC
0.82% France Index, EWQ
0.82% Europe 350 S&P Index, IEV
0.79% Real Estate US DJ, IYR
0.77% Nanotech Lux, PXN
0.76% EAFE Index, EFA
0.75% Financials VIPERs, VFH
0.75% Ultra MidCap400 Double, MVV
0.73% Industrial LargeCap Blend DJ US, IYJ
0.72% Malaysia Index, EWM
0.70% Materials SPDR, XLB
0.70% Technology MS sT, MTK
0.67% Bank Regional H, RKH
0.66% Pacific VIPERs, VPL
0.64% Growth EAFE MSCI, EFG
0.63% Ultra Dow30 Double, DDM
0.62% Japan LargeCap Blend TOPIX 150, ITF
0.61% Industrials VIPERs, VIS
0.61% Sweden Index, EWD
0.59% Netherlands Index, EWN
0.59% Internet H, HHH
0.58% Mexico Index, EWW
0.56% Value MidCap S&P 400 B, IJJ
0.55% Ultra S&P500 Double, SSO
0.54% LargeCap Blend NYSE Composite iS, NYC
0.53% Value Small Cap DJ, DSV
0.53% Software H, SWH
0.52% Growth Mid Cap Dynamic PS, PWJ
0.51% 200% Short Bond 7-10 Yr T, PST
0.49% Global Titans, DGT
0.47% Value SmallCap iS M, JKL
0.47% Taiwan Index, EWT
0.46% Materials VIPERs, VAW
0.45% Semiconductor SPDR, XSD
0.45% Retail, PMR
0.45% Value LargeCap Dynamic PS, PWV
0.44% Value 40 Large Low P/E FT DB, FDV
0.44% Wilshire 5000 ST TM, TMW
0.43% SmallCap Core iS M, JKJ
0.43% Small Cap VIPERs, VB
0.43% Gold Shares S.T., GLD
0.41% MidCap Growth iS M, JKH
0.41% Value MidCap Russell, IWS
0.41% Ultra QQQ Double, QLD
0.40% Technology DJ US, IYW
0.40% Value Large Cap DJ, ELV
0.40% Value S&P 500 B, IVE
0.38% Technology Global, IXN
0.38% Dividend International, PID
0.38% DIAMONDS (DJIA), DIA
0.37% Energy Global, IXC
0.36% Telecommunications Global, IXP
0.36% Growth LargeCap iS M, JKE
0.36% Technology GS, IGM
0.36% LargeCap Blend Socially Responsible iS, KLD
0.35% MidCap VIPERs, VO
0.35% Blend Total Market VIPERs, VTI
0.34% Value SmallCap VIPERS, VBR
0.33% Info Tech VIPERs, VGT
0.33% Consumer D. VIPERs, VCR
0.33% MidCap S&P 400 iS, IJH
0.33% United Kingdom Index, EWU
0.33% Germany Index, EWG
0.32% MidCap S&P 400 SPDRs, MDY
0.32% LargeCap Blend S&P 1500 iS, ISI
0.32% Metals & Mining SPDR, XME
0.31% Value VIPERs, VTV
0.31% S&P 500 iS LargeCap Blend, IVV
0.31% Value MidCap Dynamic PS, PWP
0.31% MidCap Russell, IWR
0.30% LargeCap VIPERs, VV
0.30% Growth MidCap 400 B, IJK
0.29% Growth MidCap Russell, IWP
0.29% LargeCap Blend Total Market DJ, IYY
0.29% Japan Index, EWJ
0.29% Pharmaceutical H, PPH
0.29% LargeCap Blend S&P 100, OEF
0.28% Global 100, IOO
0.27% Value LargeCap Russell 3000, IWW
0.27% Internet Architecture H, IAH
0.27% LargeCap 1000 R, IWB
0.25% Extended Mkt VIPERs, VXF
0.25% Growth VIPERs, VUG
0.25% Growth Large Cap, ELG
0.25% Growth LargeCap NASDAQ 100, QQQQ
0.24% Growth 1000 Russell, IWF
0.24% Consumer Cyclical DJ, IYC
0.23% Natural Resource iS GS, IGE
0.22% S&P 500 SPDRs LargeCap Blend, SPY
0.21% Semiconductor iS GS, IGW
0.20% Dividend SPDR, SDY
0.20% Technology SPDR, XLK
0.20% Growth MidCap S&P 400, RFG
0.19% Software, IGV
0.19% Healthcare Global, IXJ
0.19% Growth LargeCap Russell 3000, IWZ
0.19% Consumer Discretionary SPDR, XLY
0.18% IPOs, First Tr IPOX-100, FPX
0.17% LargeCap Blend S&P=Weight R, RSP
0.17% Value 1000 Russell, IWD
0.16% Basic Materials DJ US, IYM
0.15% Value LargeCap NYSE 100 iS, NY
0.15% Growth S&P 500/BARRA, IVW
0.14% Dividend High Yield Equity PS, PEY
0.13% OTC Dynamic PS, PWO
0.12% Semiconductor H, SMH
0.12% Value LargeCap iS M, JKF
0.11% Dividend Appreciation Vipers, VIG
0.11% Leisure & Entertainment, PEJ
0.10% China 25 iS, FXI
0.08% Belgium Index, EWK
0.08% Value Line Timeliness MidCap Gr, PIV
0.07% Brazil Index, EWZ
0.06% Health Care VIPERs, VHT
0.05% Value SmallCap S&P 600 B, IJS
0.05% Healthcare DJ, IYH
0.05% LargeCap Blend Core iS M, JKD
0.05% LargeCap Blend Russell 3000, IWV
0.05% Dividend DJ Select, DVY
0.04% LargeCap Rydex Rus Top 50, XLG
0.03% MidCap Blend Core iS M, JKG
0.02% Consumer Non-Cyclical, IYK
0.02% Value SmallCap S&P 600, RZV
0.00% Value LargeCap Euro STOXX 50 DJ, FEU
0.00% Utilities SPDR, XLU
0.00% Software, PSJ
0.00% India Earnings WTree, EPI
0.00% Growth S&P 500, RPG
0.00% Consumer Staples SPDR, XLP
-0.01% SmallCap PS Zacks, PZJ
-0.01% Bond, 1-3 Year Treasury, SHY
-0.02% Oil Services H, OIH
-0.03% Growth Small Cap DJ, DSG
-0.03% Capital Markets KWB ST, KCE
-0.03% Growth LargeCap NASDAQ Fidelity, ONEQ
-0.03% Health Care SPDR, XLV
-0.05% Retail H, RTH
-0.06% Growth SmallCap VIPERs, VBK
-0.07% Dividend Leaders, FDL
-0.07% Silver Trust iS, SLV
-0.08% Bond, Aggregate, AGG
-0.08% Emerging 50 BLDRS, ADRE
-0.08% Lg Cap Growth PSD, PWB
-0.08% Networking, IGN
-0.10% SmallCap S&P 600, IJR
-0.11% Growth SmallCap R 2000, IWO
-0.12% Food & Beverage, PBJ
-0.12% Pharmaceuticals, PJP
-0.13% Microcap Russell, IWC
-0.13% Growth BARRA Small Cap 600, IJT
-0.14% Growth SmallCap Dynamic PS, PWT
-0.14% Value SmallCap Russell 2000, IWN
-0.15% SmallCap Russell 2000, IWM
-0.16% Consumer Staples VIPERs, VDC
-0.16% Emerging VIPERs, VWO
-0.19% Emerging Markets, EEM
-0.22% Insurance, PIC
-0.23% Utilities VIPERs, VPU
-0.23% Energy DJ, IYE
-0.24% Short 100% QQQ, PSQ
-0.24% Semiconductors, PSI
-0.25% Energy VIPERs, VDE
-0.25% Latin Am 40, ILF
-0.26% Dividend Achievers PS, PFM
-0.27% Utilities, PUI
-0.27% Bond, 10 Year Treasury, IEF
-0.28% Short 100% S&P 500, SH
-0.28% Telecom DJ US, IYZ
-0.28% South Korea Index, EWY
-0.30% Utilities DJ, IDU
-0.30% LargeCap Blend Dynamic PS, PWC
-0.31% Energy SPDR, XLE
-0.31% Short 100% Dow 30, DOG
-0.31% Telecommunications & Wireless, PTE
-0.32% Oil & Gas, PXJ
-0.33% Hong Kong Index, EWH
-0.33% Growth SmallCap iS M, JKK
-0.34% Utilities H, UTH
-0.36% Short 100% MidCap 400, MYY
-0.36% Bond, TIPS, TIP
-0.38% Homebuilders SPDR, XHB
-0.39% Bond, 20+ Years Treasury, TLT
-0.40% WilderHill Clean Energy PS, PBW
-0.42% Transportation Av DJ, IYT
-0.43% Water Resources, PHO
-0.43% Short 200% QQQ PS, QID
-0.44% Biotech SPDR, XBI
-0.44% China LargeCap Growth G D H USX PS, PGJ
-0.46% Value SmallCap Dynamic PS, PWY
-0.46% Bond, Corp, LQD
-0.51% Bond High-Yield Corporate, HYG
-0.53% Micro Cap Zachs, PZI
-0.54% Telecom H, TTH
-0.58% Telecom Services VIPERs, VOX
-0.60% Energy Exploration & Prod, PXE
-0.67% Short 200% S&P 500 PS, SDS
-0.69% Building & Construction, PKB
-0.76% Short 200% Dow 30 PS, DXD
-0.78% Short 200% MidCap 400 PS, MZZ
-0.83% Biotech H, BBH
-1.13% Preferred Stock iS, PFF
-1.34% Biotech & Genome, PBE
-1.44% Internet B2B H, BHH
-2.20% Financial Preferred, PGF

Forex Market Update

Analysis by:John Hardy
Market trying to take USD to new lows for the cycle after equity comeback late yesterday.

AUDUSD toying with 12-month highs. Last year apparently never happened....

MAJOR HEADLINES – PREVIOUS SESSION

* New Zealand Jul. Building Permits rose 5.0% vs. 8.0% expected and -9.6% in Jun.
* UK Aug. GfK Consumer Confidence steady at -25 vs. -24 expected
* Japan Jul. Jobless Rate rose to 5.7% vs. 5.5% expected and 5.4% in Jun.
* Japan Jul. Household Spending fell -2.0% vs. -0.5% expected
* Japan Jul. CPI ex Food and Energy fell -0.9% YoY vs. -0.8% expected and -0.7% in Jun.
* Sweden Jul. PPI out at +0.7% MoM vs. +0.3% expected
* Sweden Jul. Retail Sales rose +1.9% MoM vs. +0.4% expected
* UK Q2 GDP fell -0.7% QoQ vs. -0.8% expected and -0.8% in Q1
* EuroZone Aug. Consumer Confidence out at -22 vs. -21 expected and -23 in Jul.
* EuroZone Aug. Industrial/Services Confidence out at -26/-11 vs. -28/-17 expected and -30/-18 in Jul.
* Switzerland KOF Swiss Leading Indicator rose to -0.04 vs. -0.6 expected and -0.85 in Jul.
* Canada Q2 Current Account out at CAD -11.2B as expected and vs. CAD -7.7B in Q1
* Canada Jul. Industrial Product Price fell -0.5% as expected
* US Jul. Personal Income/Spending out at 0.0% /+0.2% vs. +0.1%/+0.2% expected
* US Jul. PCE Deflator out at -0.8% YoY vs. -0.9% expected and -0.4% in Jun.
* US PCE Core out at 1.4% YoY as expected


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

* US Aug. University of Michigan Confidence (1400)
* UK Aug. Hometrack Housing Survey (Sun. 2301)
* Japan Aug. Nomura/JMMA Manufacturing PMI (Sun. 2315)
* Japan Jul. Industrial Production (Sun. 2350)
* Japan Jul. Retail Trade (Sun. 2350)
* Australia Jul. HIA New Home Sales (Mon. 0100)
* Japan Jul. Labor Cash Earnings (Mon. 0130)
* New Zealand Aug. NBNZ Business Confidence (Mon. 0300)
* Japan Jul. Housing Starts (Mon. 0500)
* Japan Jul. Construction Orders (Mon. 0500)
* Japan BoJ Governor Shirakawa to Speak (Mon 0530)

Market Comments:

After late yesterday's nasty bear squeeze in equity markets that punished short-term traders' long USD positions, the market has been looking for a follow up move today in USD weakness, but this has mostly been frustrated outside of the commodity currencies, where USDCAD was down to tickle the 1.0800 level and AUDUSD has been having a go at the mid-August high, which was the highest level since last September. So many market indicators of risk are at their "post-Lehman" highs that we begin to wonder if the last year ever happened... The markets apparently don't think so. The rosy view of the future is simply astounding, and fighting it has been no pleasant task...

The weak USD move...
Considering the quality of yesterday's move on scant liquidity, it was clear that this was more of a stop-fest than a "real market move". There may be an element of nervousness about month-end fixing today and Monday as well. Last month saw a tremendous fall in the USD on the last day of July and first day of August, a move that generated the low for the year in the USD, before it spent the rest of the month range trading with no new impulse. In other words - be suspicious of the next couple of days of market action, after yesterday, it certainly appears that the market wants to test new lows in the greenback, but every consensus technical trade from market developments of late has been frustrated, so we throw up our hands and wait for next Tuesday for more clarity. Very tactically, a close back below 1.4325 today would make the USD sell-off look very suspect. Until then, it's Bombs Away! for the USD bears.

CAD: Deficit Nation?
The Canadian Current Account Deficit fails to draw much attention as CAD trades at strong levels vs. the market once again. Why is this? Is it not remarkable that a nation that formerly ran a large and consistent current account surplus is now running an annualized current account deficit of -3% of GDP? A year ago, the country was running surpluses of around +2% GDP - making for an overall delta of almost -5%. Ah, yes, but last year never happened and we're quickly going to revert to the good old 2004-06 status quo, so everything will simply return to the way it was before...

Japan's Election
The election in Japan is to be held this weekend and promises a sea change in the national political scene, as the opposition Democrats will sweep to power. The implications for markets are very unclear at this time. Everyone notes that the party will be less interested in supporting the industrial/exporting complex as this tired LDP policy now (finally!) holds zero credibility. At the same time, the Democrats have criticized weak JPY policies that were part and parcel of the LDP support for industry in the past. They would prefer to see support for individual incomes and consumption. But how they will accomplish such a miracle after a couple of generations of engrained behavior is not at all clear. They should start with subsidies for child-bearing, judging from the dire state of the country's demographic profile. Everything adds up to uncertainty in the shortest term, which all things being equal means a weaker JPY going into the elections. We'll watch for signs of JPY resilience in the non-USD crosses going forward, however.

Pie in the Sky
As we go to press, the US equity markets are opening at new highs on the year on Intel's new upbeat forecasts (merely a 12% shrinkage of last years Q3 revenues are now expected for Q3 of this year - wildly bullish!) It appears green shoots are turning into sturdy saplings and the last twelve months never happened and all of the profound structural changes underway that are rapidly wiping away the old global imbalances are going to halt forthwith as we ease back into the good old days of the Great Credit Bubble. The market seems to be eating a very large portion of pie in the sky.

Stock Market Commentary

Stock Market: after 4 days up, a little hesitation or pullback is normal.

NASDAQ Composite Relative Strength Ratio compared to the S&P 500 has turned down since 7/23/09 and broke down below the lows of the previous 10 weeks on 8/24/09.

Consumer Discretionary Stock Sector Relative Strength Ratio (XLY/SPY) broke down below the lows of the previous 5 weeks on 8/24/07.

Crude price continued its uptrend.

Spotlight on event stocks: Here is a stock screen I designed to pick out potential event stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are revealed to be deal stocks, sooner or later, or are the subject of some other extraordinary events, positive or negative.

Bullish Stocks: Rising Price and Rising Volume
% Price Change, Symbol, Name
41.67% , FNM , FANNIE MAE
4.00% , TBH , Telebras HOLDRS, TBH
18.50% , FRE , FREDDIE MAC
2.27% , ADRU , Europe 100 BLDRS, ADRU
0.33% , IAH , Internet Architecture H, IAH
7.96% , ABK , AMBAC FINL GRP
8.11% , AMD , ADV MICRO DEV
0.96% , EWI , Italy Index, EWI
5.16% , SLM , SLM CORP
5.25% , LPX , LOUISIANA PAC
3.29% , HMA , HEALTH MGMT STK A
5.78% , UIS , UNISYS
3.51% , MHP , MCGRAW HILL
2.47% , EP , EL PASO
0.27% , UTH , Utilities H, UTH
2.44% , HUM , HUMANA
2.66% , UNH , UNITEDHEALTH GRP
1.14% , NVLS , NOVELLUS SYS
4.44% , HGSI , Human Genome Sciences Inc
2.62% , HON , HONEYWELL INTL
0.92% , BIG , BIG LOTS
3.16% , EWO , Austria Index, EWO
1.17% , PXN , Nanotech Lux, PXN
0.39% , EFV , Value EAFE MSCI, EFV
2.92% , LAMR , Lamar Advertising Company
1.34% , RAI , RJR TOBACCO HLDS
1.20% , EWT , Taiwan Index, EWT
0.34% , EWK , Belgium Index, EWK
2.38% , HIG , HARTFORD FINL
1.32% , TEVA , Teva Pharmaceutical Industries Limited
2.47% , ASH , ASHLAND
2.00% , DELL , DELL
1.12% , AES , AES
1.30% , VDE , Energy VIPERs, VDE
1.80% , RFMD , RF Micro Devices Inc
0.81% , COL , ROCKWELL COLLINS
3.68% , XL , XL CAPITAL STK A
2.51% , CBS , CBS CORP.
2.75% , BA , BOEING
1.12% , TNB , THOMAS & BETTS

Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-3.46% , KSU , Kansas City Southern, KSU
-2.38% , BHH , Internet B2B H, BHH
-0.22% , JKI , Value MidCap iS M, JKI
-4.26% , F , FORD MOTOR
-1.80% , RKH , Bank Regional H, RKH
-0.56% , JKL , Value SmallCap iS M, JKL
-0.44% , DGT , Global Titans, DGT
-4.08% , PNC , PNC FINL SVC
-4.48% , BBY , BEST BUY
-0.89% , XSD , Semiconductor SPDR, XSD
-3.75% , STI , SUNTRUST BANKS
-2.98% , GNTX , Gentex Corporation
-0.86% , VAW , Materials VIPERs, VAW
-4.39% , MI , MARSHAL & ILSLEY
-5.24% , SNV , SYNOVUS
-2.50% , COH , COACH
-2.25% , MRVL , MARVELL TECHNOLOGY
-3.57% , FITB , FIFTH THIRD BANC
-1.89% , AMAT , APPLIED MATERIAL
-0.48% , IXP , Telecommunications Global, IXP
-0.16% , DSG , Growth Small Cap DJ, DSG
-1.79% , S , SPRINT NEXTEL
-1.43% , IAU , Gold COMEX iS, IAU
-0.29% , JKG , MidCap Blend Core iS M, JKG
-1.21% , ISIL , INTERSIL CORP
-3.15% , SHLD , SEARS HOLDINGS
-0.25% , PKB , Building & Construction, PKB
-1.24% , CSX , CSX
-0.20% , PZJ , SmallCap PS Zacks, PZJ
-1.30% , PST , 200% Short Bond 7-10 Yr T, PST
-2.90% , CIT , CIT GROUP
-1.33% , SPLS , STAPLES
-0.49% , RZV , Value SmallCap S&P 600, RZV
-1.70% , KO , COCA COLA
-2.38% , SBUX , STARBUCKS
-0.98% , ADM , ARCHER DANIELS
-3.47% , RYAAY , Ryanair Holdings plc
-0.41% , IJK , Growth MidCap 400 B, IJK
-5.23% , GT , GOODYEAR TIRE
-0.82% , IYF , Financial DJ US, IYF

9 major U.S. stock sectors ranked in order of long-term relative strength:

Technology (XLK) Neutral, Market Weight. The Relative Strength Ratio (XLK/SPY) turned down after 7/22/09. XLK was so strong from 12/31/08 to 7/22/09 that it still ranks high in this long-term relative strength ranking. XLK/SPY rose to its highest level in 7 years on 7/22/09, confirming a long-term uptrend in effect since 9/30/02.

Consumer Discretionary (XLY) Neutral, Market Weight. The Relative Strength Ratio (XLY/SPY) broke down below the lows of the previous 5 weeks on 8/24/07. The ratio turned down after 8/7/09, suggesting a more defensive tone to the market. Long term, XLY/SPY has trended downward since 1/5/05. XLY was strong from 11/19/08 to 4/30/09, and that past strength accounts for XLY’s high ranking here.

Health Care (XLV) Neutral, Market Weight. The Relative Strength Ratio (XLV/SPY) has flattened out in recent months. Long term, XLV/SPY has trended upward for 15 months, since 5/15/08.

Materials (XLB) Neutral, Market Weight. The Relative Strength Ratio (XLB/SPY) turned down moderately after 8/5/09 for a mild short-term correction. Long term, XLB/SPY has been in a secular Bull trend since 9/27/00.

Financial (XLF) Neutral, Market Weight. The Relative Strength Ratio (XLF/SPY) has flattened out in recent weeks. It outperformed from 3/6/09 to 8/7/09. Long term, XLF/SPY has been in a secular Bear trend since 3/23/04.

Consumer Staples (XLP) Neutral, Market Weight. The Relative Strength Ratio (XLP/SPY) underperformed moderately since 11/20/08. Long term, XLP/SPY was in a secular Bull trend from 3/27/00 to 11/20/08.

Industrial (XLI) Bearish, Underweight. The Relative Strength Ratio (XLI/SPY) in recent months appears to be consolidating previous massive losses. XLI/SPY fell long and hard from 3/31/08 to 3/6/09.

Utilities (XLU) Bearish, Underweight. The Relative Strength Ratio (XLU/SPY) has stabilized and has been about flat since 6/9/09. XLU/SPY underperformed from 11/21/08 to 6/9/09.

Energy (XLE) Bearish, Underweight. The Relative Strength Ratio (XLE/SPY) recovered to a 3-week high on 8/24/09, which may seem bullish for the short term. The problem is that it just made a new 10-month low on 8/17/09, to confirm a Bearish cycle phase. XLE/SPY has trended down since 7/1/08.

The relative performance ratios of the 9 major sectors appear to be shifting back again toward avoidance of risk. The sectors reflected a growing investor appetite for risk in March and April 2009, shifted away from risk from May into early July, then shifted toward risk from 7/13/09 to early August.

Emerging Markets Stocks ETF (EEM) Relative Strength Ratio (EEM/SPY) has been trending down since making a peak on 8/3/09 and broke 4-week lows on 8/17/09. Still, the EEM/SPY Ratio may be in a rising trend from the low on 10/24/08. In addition, absolute price has been in a rising trend since 11/20/08.

Foreign Stocks ETF (EFA) Relative Strength Ratio (EFA/SPY) peaked on 8/3/09 and has eased lower since. EFA/SPY is still up YTD, but only very slightly. Long term, EFA underperformed since 11/27/07. EFA is the ETF representing the EAFE, the international developed country stock markets, excluding the U.S. and Canada.

NASDAQ Composite Relative Strength Ratio compared to the versus the S&P 500 has turned down since 7/23/09 and broke down below the lows of the previous 10 weeks on 8/24/09.

Growth Stock/Value Stock Relative Strength Ratio (IWF/IWD) appears to be turning choppy/neutral/sideways in recent months. Long term, the RS Ratio has been in an uptrend since 8/8/06, indicating major trend strength.

Russell 1000 Value ETF Relative Strength Ratio (IWD/SPY) appears to be turning choppy/neutral/sideways in recent months. Long term, the IWD RS Ratio remains in a Bearish Major Trend, underperforming the SPY since 3/22/07.

The S&P 500 equally weighted index rose a new high relative to the S&P 500 capitalization weighted index on 8/13/09, confirming a major uptrend.

The Largest Cap S&P 100 / S&P 500 Relative Strength Ratio (OEX/SPX) has stabilized since making a low on 8/7/09. The ratio had been in a downtrend from 11/20/08 to 8/7/09, indicating that the largest capitalization stocks were lagging the broader market.

The Small Cap/Large Cap Relative Strength Ratio (IWM/SPY) has firmed modestly since 8/17/09. The ratio made a 9-month high on 8/4/09, which indicated a relative uptrend for the longer term for Small Cap stocks.


The Mid Cap/Large Cap Relative Strength Ratio (MDY/SPY) broke down below 2-week lows on 8/17/09, confirming a downtrend for the short term.

Crude Oil nearest futures contract price continued its uptrend. Oil broke out above its previous high at 73.38 set on 6/30/09. Oil now appears to have further upside potential, possibly to the 85-90 zone.

The Energy stock sector has underperformed Crude Oil since 2/18/09. The XLE to Crude Oil Ratio broke down to a new 7-month low on 6/29/09.

Gold nearest futures contract price gave back most of Friday’s gain. Gold appears to have some resistance at previous highs of 957.6 and 960.1. For support, watch previous lows at 931.5, 927.2, 925.2 and 904.8, based on the nearest futures contract. Intermediate term, Gold appears to be in a triangle consolidation since 2/16/09. Longer term, Gold has been consolidating since making a peak at 1,033.9 on 3/17/08.


Gold Mining Stocks ETF (GDX) Relative Strength Ratio (relative to Gold bullion) broke previous 4-week lows on 8/17/09, which may be Bearish for both GDX and Gold bullion.

Silver/Gold ratio peaked on 6/2/09 and has entered a short-term downtrend since 8/13/09, suggesting waning confidence in world economic recovery.

Copper nearest futures contract price broke out above the highs of the previous 3 trading days, suggesting a minor turn back toward confidence in world economic recovery.

U.S. Treasury Bond nearest futures contract price broke down below the lows of the previous 4 trading days on 8/21/09. The minor trend has been Bullish but now appears to be correcting. Intermediate term, Bonds appear to be consolidating in a neutral trading range. On 8/7/09, Bonds found support at the upper end of the 112-115 zone of many previous reversal points (including both lows and highs).

Bond quality ratio (LQD/TLT) turned down again. LQD/TLT is iShares iBoxx $ Invest Grade Corp Bond ETF (LQD) price divided by 20+ Years US Treasury Bond ETF price (TLT).

The U.S. dollar nearest futures contract price fell below the lows of the previous 10 trading days on 8/21/09, which was a bearish confirmation of the preexisting short-term downtrend. Intermediate term, USD may be merely consolidating losses within a Bearish trend. Longer term, USD fell below 10-month lows on 8/5/09 and remains in a Bearish trend since its peak set on 3/4/09.

The Art of Contrary Thinking: The various surveys of investor sentiment are best considered as background factors. The majority of investors can be right for a long time before a major trend finally changes course. So, Contrary Thinking should be used with more precise market timing tools.

Advisory Service Sentiment: There were 48.3% Bulls versus 23.1% Bears as of 8/19/09, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio was 2.09, down from 2.32 the previous week. That 2.32 was the highest reading since 12/26/07. The ratio’s 39-year range is 0.28 to 17.51, the median is 1.43, and the mean is 1.73.

VIX Fear Index has been fluctuating sideways between 23 and 28 since 7/24/09, after falling from a peak of 80.86 set on 11/20/08. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

VXN Fear Index has been fluctuating sideways between 24 and 28 since 7/17/09, after falling from a peak of 80.64 set on 11/20/08. VXN measures NASDAQ Volatility using a method comparable to that used for VIX.

ISEE Call/Put Ratio rose to 1.19 on 8/24/09, still indicating bearish sentiment. The ratio’s 5-year mean is 1.43, median is 1.38, and its range is 0.51 to 3.16.

CBOE Put/Call Ratio rose to 0.54 on 8/24/09, indicating bullish sentiment. The ratio’s 5-year mean is 0.67, median is 0.65, and its range is 0.35 to 1.35.

Fundamentals: The 2003-2007 Bull Market was fed by abundant global liquidly, M&A, leveraged buyouts, corporate stock buybacks, and a net balance of positive earnings surprises. The unfolding fallout from the credit market crisis derailed that engine. Since the stock market low on 3/9/09, massive monetary and fiscal stimulation appears to have had an increasingly Bullish impact on investor sentiment.

The Dow Theory signaled a Primary Tide Bull Market on 7/23/09 when both the Dow-Jones Industrial Average the Dow-Jones Transportation Average closed above their May-June 2009 closing price highs. This reverses the previous signal: the two Averages signaled a Primary Tide Bear Market on 11/21/07, when both Averages closed below their closing price lows of August, 2007.

S&P 500 Cash Index Potential Resistance
1,576.09, high of 10/11/2007
1,552.76, high of 10/31/2007
1,523.57, high of 12/11/2007
1,498.85, high of 12/26/2007
1,440.24, high of 5/19/2008
1,406.32, high of 5/29/2008
1,381.50, Fibonacci 78.6% of 2007-2009 drop
1,366.59, high of 6/17/2008
1,335.63, high of 6/25/2008
1,313.15, high of 8/11/2008
1,274.42, high of 9/8/2008
1,255.09, high of 9/12/2008
1,238.807, Fibonacci 78.6% of 1,576.09 high
1,228.74, Fibonacci 61.8% of 2007-2009 drop
1,220.03, high of 9/25/2008
1,121.44, Fibonacci 50.0% of 2007-2009 drop
1,077.08, Fibonacci 61.8% of 2002-2007 upmove
1,044.31, high of 10/14/2008

S&P 500 Cash Index Potential Support
1,014.14, Fibonacci 38.2% of 2007-2009 drop
1009.06, low of 8/21/2009
1,007.78, Gann 37.5% of 2007-2009 drop
978.51, low of 8/17/2009
956.23, high of 6/11/2009
930.17, high of 5/8/2009
869.32, low of 7/8/2009
826.83, low of 4/21/2009
814.53, low of 4/7/2009
813.62, high of 4/1/2009
779.81, low of 3/30/2009
666.79, intraday low of 3/6/2009
665.23, Fibonacci 61.8% of 2002-2007 upmove
602.07, Fibonacci 38.2% of 1,576.09 high

Daily Rankings of Major ETFs, Ranked from Strongest to Weakest of the Day:
% Price Change, ETF Name, Symbol

3.16% Austria Index, EWO
2.27% Europe 100 BLDRS, ADRU
2.15% Australia Index, EWA
1.81% Bond, 20+ Years Treasury, TLT
1.60% Pacific ex-Japan, EPP
1.30% Energy VIPERs, VDE
1.28% Energy SPDR, XLE
1.28% Singapore Index, EWS
1.23% Energy DJ, IYE
1.21% Oil & Gas, PXJ
1.20% Taiwan Index, EWT
1.17% Nanotech Lux, PXN
1.07% Oil Services H, OIH
0.96% Italy Index, EWI
0.78% Short 200% MidCap 400 PS, MZZ
0.72% Euro STOXX 50, FEZ
0.70% Health Care SPDR, XLV
0.66% South Korea Index, EWY
0.66% Financial Preferred, PGF
0.62% Bond, 10 Year Treasury, IEF
0.58% Value LargeCap Dynamic PS, PWV
0.55% Energy Exploration & Prod, PXE
0.54% Pharmaceutical H, PPH
0.52% Aerospace & Defense, PPA
0.51% Bond, Corp, LQD
0.44% Emerging Markets, EEM
0.44% IPOs, First Tr IPOX-100, FPX
0.42% Telecom H, TTH
0.42% Health Care VIPERs, VHT
0.41% Bond, Aggregate, AGG
0.40% Short 100% MidCap 400, MYY
0.39% Energy Global, IXC
0.39% Value EAFE MSCI, EFV
0.38% Healthcare DJ, IYH
0.37% Internet H, HHH
0.36% Pharmaceuticals, PJP
0.35% Bond, TIPS, TIP
0.34% Belgium Index, EWK
0.33% Internet Architecture H, IAH
0.33% Value 40 Large Low P/E FT DB, FDV
0.32% Natural Resource iS GS, IGE
0.31% Metals & Mining SPDR, XME
0.31% Growth S&P 500/BARRA, IVW
0.27% Utilities H, UTH
0.26% LargeCap Rydex Rus Top 50, XLG
0.26% Growth S&P 500, RPG
0.25% MidCap Russell, IWR
0.25% Value LargeCap NYSE 100 iS, NY
0.25% Value SmallCap Dynamic PS, PWY
0.25% Value LargeCap iS M, JKF
0.25% Ultra S&P500 Double, SSO
0.24% Switzerland Index, EWL
0.23% Short 200% QQQ PS, QID
0.22% Utilities VIPERs, VPU
0.22% Ultra Dow30 Double, DDM
0.20% Malaysia Index, EWM
0.20% Industrial SPDR, XLI
0.19% Emerging VIPERs, VWO
0.19% Healthcare Global, IXJ
0.19% LargeCap Blend S&P 100, OEF
0.18% Oil, Crude, U.S. Oil Fund, USO
0.18% Growth SmallCap R 2000, IWO
0.17% Commodity Tracking, DBC
0.17% Utilities SPDR, XLU
0.17% Growth SmallCap VIPERs, VBK
0.16% Software H, SWH
0.15% Global 100, IOO
0.14% Technology Global, IXN
0.14% Utilities DJ, IDU
0.14% Pacific VIPERs, VPL
0.14% South Africa Index, EZA
0.13% Blend Total Market VIPERs, VTI
0.13% France Index, EWQ
0.13% Industrial LargeCap Blend DJ US, IYJ
0.12% Biotech & Genome, PBE
0.12% Bond, 1-3 Year Treasury, SHY
0.12% Short 100% QQQ, PSQ
0.11% Value VIPERs, VTV
0.11% India Earnings WTree, EPI
0.11% DIAMONDS (DJIA), DIA
0.10% Dividend Leaders, FDL
0.09% Dividend Achievers PS, PFM
0.09% Industrials VIPERs, VIS
0.08% Canada Index, EWC
0.08% Telecom Services VIPERs, VOX
0.07% Growth LargeCap NASDAQ Fidelity, ONEQ
0.06% Spain Index, EWP
0.06% LargeCap Blend Total Market DJ, IYY
0.06% Growth BARRA Small Cap 600, IJT
0.05% Microcap Russell, IWC
0.04% Consumer Staples SPDR, XLP
0.03% Value LargeCap Russell 3000, IWW
0.03% EMU Europe Index, EZU
0.02% LargeCap VIPERs, VV
0.00% Value 1000 Russell, IWD
0.00% Netherlands Index, EWN
0.00% Lg Cap Growth PSD, PWB
0.00% LargeCap 1000 R, IWB
0.00% Growth Large Cap, ELG
0.00% Germany Index, EWG
0.00% Dividend International, PID
0.00% Developed 100 BLDRS, ADRD
-0.01% S&P 500 iS LargeCap Blend, IVV
-0.01% S&P 500 SPDRs LargeCap Blend, SPY
-0.02% LargeCap Blend Dynamic PS, PWC
-0.02% EAFE Index, EFA
-0.02% Growth LargeCap iS M, JKE
-0.03% Wilshire 5000 ST TM, TMW
-0.03% Emerging 50 BLDRS, ADRE
-0.03% Preferred Stock iS, PFF
-0.03% Value LargeCap Euro STOXX 50 DJ, FEU
-0.03% SmallCap Russell 2000, IWM
-0.05% Short 200% S&P 500 PS, SDS
-0.05% Consumer Staples VIPERs, VDC
-0.05% LargeCap Blend Russell 3000, IWV
-0.05% Software, PSJ
-0.05% Growth LargeCap Russell 3000, IWZ
-0.06% Growth VIPERs, VUG
-0.07% Growth 1000 Russell, IWF
-0.07% Software, IGV
-0.07% Food & Beverage, PBJ
-0.07% Value Large Cap DJ, ELV
-0.08% Asia 50 BLDRS, ADRA
-0.08% Growth SmallCap Dynamic PS, PWT
-0.10% LargeCap Blend NYSE Composite iS, NYC
-0.10% Growth LargeCap NASDAQ 100, QQQQ
-0.10% LargeCap Blend Core iS M, JKD
-0.10% Short 100% S&P 500, SH
-0.11% SmallCap Core iS M, JKJ
-0.11% Value SmallCap S&P 600 B, IJS
-0.11% Telecom DJ US, IYZ
-0.11% LargeCap Blend S&P 1500 iS, ISI
-0.11% Value Small Cap DJ, DSV
-0.12% Telecommunications & Wireless, PTE
-0.13% Info Tech VIPERs, VGT
-0.13% Hong Kong Index, EWH
-0.14% Utilities, PUI
-0.14% Europe 350 S&P Index, IEV
-0.14% SmallCap S&P 600, IJR
-0.14% Silver Trust iS, SLV
-0.15% Value SmallCap Russell 2000, IWN
-0.15% Ultra QQQ Double, QLD
-0.16% Growth EAFE MSCI, EFG
-0.16% Growth Small Cap DJ, DSG
-0.17% Short 100% Dow 30, DOG
-0.18% Extended Mkt VIPERs, VXF
-0.19% Dividend SPDR, SDY
-0.20% SmallCap PS Zacks, PZJ
-0.20% Value SmallCap VIPERS, VBR
-0.20% Japan Index, EWJ
-0.20% Technology DJ US, IYW
-0.21% LargeCap Blend Socially Responsible iS, KLD
-0.21% Technology GS, IGM
-0.21% Sweden Index, EWD
-0.22% Short 200% Dow 30 PS, DXD
-0.22% Value MidCap iS M, JKI
-0.22% OTC Dynamic PS, PWO
-0.23% MidCap S&P 400 iS, IJH
-0.24% Value MidCap Russell, IWS
-0.24% Value S&P 500, RPV
-0.24% Financials Global LargeCap Value, IXG
-0.25% Small Cap VIPERs, VB
-0.25% Biotech H, BBH
-0.25% Value MidCap S&P 400 B, IJJ
-0.25% Building & Construction, PKB
-0.25% Micro Cap Zachs, PZI
-0.25% Dividend Appreciation Vipers, VIG
-0.25% European VIPERs, VGK
-0.26% Brazil Index, EWZ
-0.26% Growth Mid Cap Dynamic PS, PWJ
-0.27% MidCap S&P 400 SPDRs, MDY
-0.27% Value S&P 500 B, IVE
-0.27% Growth MidCap Russell, IWP
-0.27% Japan LargeCap Blend TOPIX 150, ITF
-0.28% Dividend High Yield Equity PS, PEY
-0.28% LargeCap Blend S&P=Weight R, RSP
-0.29% Value LargeCap Fundamental RAFI 1000, PRF
-0.29% MidCap Blend Core iS M, JKG
-0.30% Dividend DJ Select, DVY
-0.30% Technology SPDR, XLK
-0.32% Consumer Cyclical DJ, IYC
-0.32% Growth SmallCap iS M, JKK
-0.33% Homebuilders SPDR, XHB
-0.33% United Kingdom Index, EWU
-0.33% Consumer Non-Cyclical, IYK
-0.34% REIT VIPERs, VNQ
-0.37% Growth MidCap S&P 400, RFG
-0.38% Value Line Timeliness MidCap Gr, PIV
-0.41% Biotech SPDR, XBI
-0.41% Growth MidCap 400 B, IJK
-0.44% Global Titans, DGT
-0.44% China LargeCap Growth G D H USX PS, PGJ
-0.44% Insurance, PIC
-0.46% Value MidCap Dynamic PS, PWP
-0.47% Latin Am 40, ILF
-0.48% Telecommunications Global, IXP
-0.49% Water Resources, PHO
-0.49% Value SmallCap S&P 600, RZV
-0.50% MidCap Growth iS M, JKH
-0.50% Transportation Av DJ, IYT
-0.52% Bond High-Yield Corporate, HYG
-0.54% MidCap VIPERs, VO
-0.56% Value SmallCap iS M, JKL
-0.57% Real Estate US DJ, IYR
-0.57% Retail H, RTH
-0.62% Realty Cohen & Steers, ICF
-0.63% Basic Materials DJ US, IYM
-0.66% Ultra MidCap400 Double, MVV
-0.70% Technology MS sT, MTK
-0.71% REIT Wilshire, RWR
-0.72% Consumer Discretionary SPDR, XLY
-0.74% Capital Markets KWB ST, KCE
-0.75% Financials VIPERs, VFH
-0.77% Financial SPDR, XLF
-0.79% WilderHill Clean Energy PS, PBW
-0.79% Materials SPDR, XLB
-0.82% Consumer D. VIPERs, VCR
-0.82% Financial DJ US, IYF
-0.84% Semiconductor H, SMH
-0.86% Materials VIPERs, VAW
-0.89% Semiconductor SPDR, XSD
-0.90% Leisure & Entertainment, PEJ
-0.93% China 25 iS, FXI
-0.96% Semiconductor iS GS, IGW
-0.98% Semiconductors, PSI
-1.06% Networking, IGN
-1.10% Financial Services DJ, IYG
-1.11% Retail, PMR
-1.22% Mexico Index, EWW
-1.30% 200% Short Bond 7-10 Yr T, PST
-1.40% Gold Shares S.T., GLD
-1.80% Bank Regional H, RKH
-1.90% Internet Infrastructure H, IIH
-2.38% Internet B2B H, BHH
-3.29% 200% Short US T Bond, TBT

Brian Hunt's Market Notes - DID YOU SEE WARREN BUFFETT'S WARNING?

This week, legendary investor Warren Buffett sounded a public cry for the government to be careful of inflation. You can check out his widely read op-ed piece in the New York Times here.

To paraphrase Buffett, his warning goes like this: We've headed off financial disaster by doling out a bunch of free money and credit. But we'll need a smart performance by our politicians to prevent a big inflationary mess because of it.

Buffett's warning should scare the heck out of anyone with a lot of dollar savings in the bank. You see, we sat down yesterday to recall the number of times the government has made a huge mess of things by not turning in a smart performance. We were soon exhausted from all the thinking. Fannie Mae, Freddie Mac, Hurricane Katrina, Vietnam, Iraq, the tax code, and Social Security are a few things that came to mind.

All that got us thinking about this question: Are you going to own dollars and place your lot with a group of bureaucrats – most of whom have never lived outside of government la-la land or college – trying to successfully diffuse the biggest monetary bomb in history? Or are you going own Gold and place your lot with the oldest, safest form of honest money? It's an easy choice.

China Is About to Buy a lot More Silver...

By Matt Badiali

Two years ago on August 21, China's government allowed its citizens to invest in an entirely new asset. It allowed them to invest in Hong Kong-listed stocks.

Hong Kong is a special region of China. It's one of the most dynamic, capitalistic places on Earth. The move from the government was a move toward "investment freedom" for the Chinese people.

On that day, Hong Kong's benchmark stock index rose 8.74%. Over the next two and a half months, it skyrocketed from 11,000 to over 20,000. It was a chapter in a story that you should get used to over the coming years: When the Chinese decide to invest in something, it causes giant ripples across the world.

This sort of situation is starting to happen again: This time it's happening in precious metals... especially silver.

The Chinese have a centuries-old affinity with silver. It began in the 1500s with the explosion of trade with Mexico via the Spanish galleons. These sailing ships were the super-tankers of their age. They made one voyage per year, carrying tea, silks, and spices from Asia to Mexico. The ships returned to Asia with gold and silver. After the Chinese threw off imperial rule in 1912, the country used silver money. Today, the Chinese word for "bank" means, "silver movement."

And now that China is becoming one of the richest, most dynamic capitalistic countries on Earth, this story is about to take a modern twist. The Chinese want silver again.

Thanks to a decade of wealth accumulated by regular Chinese citizens, there is plenty of cash to chase good investments. As the famed global investor Jim Rogers points out, these people are the best capitalists in the world. They are great savers. Chinese people want their money to work for them... so they invest.

I recently watched a China Central Television piece on gold investing... According to the program, there are some 400 million households in China, with an average ownership of about 0.1 ounces of gold. The average gold ownership in most emerging countries works out to about 1 ounce per household. The Chinese are beginning to make up that gap. From 2006 to 2007, domestic demand for gold rose 60% to around 700,000 ounces. Experts continue to urge citizens to put 3% to 5% of their net worth in precious metals.

Chinese government statistics show the average urban Chinese household has about $1,300 in disposable income to invest. While that doesn't seem like much, when you add up all those households, there's about $36 billion that could move into the next big investment opportunity – precious metals.

The government is now actively encouraging its citizens to buy gold and silver. They recently unveiled silver bullion for investing.



The premise is that gold was 50 times more expensive than silver in 2007... but is now 70 times more expensive.

The government is promoting silver bullion as an investment for regular citizens. And remember, a bunch of Chinese students laughed at U.S. Treasury Secretary Tim Geithner this year when he claimed the dollar was safe. The Chinese know the value of real assets... real money like gold and silver.

What does this mean for silver prices? It's impossible to say. But here's a little math that interests me. According to the Silver Institute, demand for silver in 2008 (for industry, jewelry, and investing) was 832 million ounces. At today's price, that's an $11.5 billion market... or about 1/3 the capital available in China alone.

The most important thing to understand about this situation is the Chinese people become freer every time the government loosens up a restriction. These people couldn't legally buy silver bars before. Now, they can. They're becoming richer... and they will continue to do so for decades.

Good investing,
Matt Badiali

P.S. The Chinese government isn't just urging private citizens to invest in silver. It's also conducting a huge program to develop its domestic mining industry. And when the Chinese government gets behind an investment, it almost always skyrockets. To learn how to make the biggest gains from the coming China silver craze, click here.

Risk appetite continues to swing between On and Off - Weekly Commodity Update

Investors had a difficult week as commodity markets failed to show a unified approach leaving most markets range bound. The overall question is still how much risk willingness is out there.

The energy sector had a mixed week with Crude Oil rallying almost 10% from the low point as a big draw in U.S. inventories sent investors scrambling to cover established short positions, only once again to be met with strong resistance at the top of the current trading range.

The biggest weekly drop in U.S. Crude inventories since May 2008 saw prices rally strongly as the drop was interpreted as the first sign of demand picking up. A few more weeks of similar draws will have to be seen to convince a sceptic audience that consumption indeed has turned the corner and has finally begun to rise.

One of the reasons behind the strong rally is based on the fact that investors had been selling Crude looking for a correction to the mid to low sixties and the inventory news forced a lot to cover short positions. The equally strong resistance between $74.30 and $75.30 indicates that we should continue to see the market range trade for a while longer. Look for support on the October futures contract at $70.00, $67.40 and $64.80 with the latter being trend line support from the February lows.

As we approach the September and October months which psychologically are worrying months for equities we could see money flowing away from riskier investments. We continue to see the price of oil in the mid to low sixties at year end but for now risk appetite and stable equity markets leads the way.



The Dollar will play its usual important role having weakened again this week as the S&P 500 recaptured the $1,000 level. The Japanese Yen is worth keeping an eye on as it is an important measure of risk appetite. A weaker Yen especially against the Euro is generally viewed as being an indication of increased appetite for risk. The chart above shows the strong correlation between the two.

Natural Gas prices sank to a seven year low with the spot month of September dipping below $3 having fallen 11 trading days in a row. This happened amid concerns about a supply glut as we approach the winter heating season. Production has continued to increase at a time where demand from industrial users has been weak. On top of this the relatively mild summer has reduced the use by private consumers.

Gas stocks are feared to reach record levels above 3,800 bn cubic feet by the start of the winter raising concerns that the U.S. could be facing storage capacity problems. So far the spot month has taken the brunt of the selling with the spread to the winter month contract of January 2010 having reached $2.42. This means that prices are currently expected to rise by 83% over the next five months for, something that seems unlikely given the current supply forecasts.

Technically the market is now into oversold territory and the risk of snap rebound is getting closer, however given the above reasons that would probably be met by new selling. As the September contract expires next week attention will turn to the October contract which currently trades around $3.3.

Gold continues its listless trading following the ups and downs of the dollar. The month long trading range leaves it with a decreased room for maneuvering and once the break out occurs I would not expect too much fireworks.

The current trading range on spot Gold is $928 to $977 and given the time spent in this range I doubt a break out would result in a major change. On that basis I will be looking for support at $928 and $905 while resistance can be found at $960 and $977.

Blood in the Streets

Regular readers know I've started buying real estate again. But I'm not doing it because I think the market is about to rebound. On the contrary, I don't think we will see 2004 prices for another 10 years. At least. In the meantime, you can still make plenty of money.

The reason the market will stay weak is because of economic fundamentals. I've mentioned them before: failing businesses, growing unemployment, pent up credit card debt, etc., etc.

By the first quarter of 2011, Deutsche Bank tells us nearly 50 percent of Americans with home mortgages (about 25 million) will be "under water." That is about double the current rate. A third of those (8 million) will owe more than 125 percent of their home's value.

If that proves true, buyers can expect plenty of bargains in the coming years. But, as I said, I'm not waiting around till some big bank tells me what to do. I'm buying now when the numbers are good. If I can put down 20 percent and get positive net cash flow out of a residential property, I'm going for it. The time to make big profits is, and always has been, when blood is running in the streets.

Forex Market Update

Analysis by:
John Hardy
Consultant/FX Strategist

Risk comeback sees yet another direction change. But hyperactive Chinese equity action sees less reaction in FX than in days past.

Yesterday's USD sell-off disappoints the dollar bulls. Are we really headed back into a range?

MAJOR HEADLINES – PREVIOUS SESSION

* Switzerland Jul. Trade Balance out at 2.35B vs. 1.50B in Jun.
* Japan Jul. Convenience Store Sales fell -7.5% YoY vs. -2.3% in Jun.
* Norway Q2 GDP out at -1.3% QoQ and Mainland GDP out at +0.3% vs. -0.7%/-0.3% expected, respectively
* UK Jul. Retail Sales out at +0.4% MoM as expected
* Switzerland Aug. ZEW Survey out at 18.6 vs. 0.0 in Jul.
* US Weekly Initial Jobless Claims out at 576k vs. 550k expected and 561k the previous week
* US Weekly Continuing Claims out at 6241k vs. 6215k expected and 6239k the previous week

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

* US Jul. Leading Indicators (1400)
* US Aug. Philadelphia Fed (!400)
* US Q2 Mortgage Delinquencies (1400)
* US Treasury Secretary Geithner to Speak (!730)
* New Zealand Jul. Credit Card Spending (0300)

Market Comments:

The daily roller coaster ride in the Shanghai Composite has seen less of a reaction today in FX compared to the fireworks the previous days' action has touched off - especially in JPY crosses. That's perhaps because, while global equities initially sold off yesterday in reaction to a very ugly session in Shanghai, the US market decided to ignore the development and rallied furiously from gap lows at the open. The ability of the US market to ignore China's lead in the short term meant an ugly reversal for those who pounced on the risk averse trade simply due to the tremors in China. Still, the rally in Asia saw the JPY weaker overnight before JPY crosses eased a bit lower in today's European session.

The USD was a big mover to the downside as well yesterday as the sharp reversal in risk slammed the short term USD longs that were being put on in anticipation of a new trend developing. This puts us back in the range again as the USD bulls still need that pesky 55-day moving average in EURUSD to fall on the close to see better confirmation that a potential rally is underway. The squeeze on shorter term USD longs could take us back higher for a retest of the highs in EURUSD, even if this ranging market suggests that both sides are having a tough time finding conviction that will stick...

We're rubbing our eyes in disbelief at a survey from Bank of America/Merrill Lynch indicating that investor optimism is the highest since 2003. 2003 saw a tremendous rally in equities, of course, so one can make that point against the contrarian argument that extreme bullishness is a sign of an imminent top. Still, there seems to be an awful lot of faith in the recovery with no reasonable explanation of how the consumer is going to decide to lay on even more debt. All manner of analysis have shown how GDP of the unhealthy post-2001 recover was largely based on increased debt and how it took more and more dbt. Yes, the Central Banks have "saved us all" by stabilizing the banks and world financial markets, but this has also served to keep all of the debt "alive" rather than allowing the whole system to collapse and The short term horrors have been avoided - but the continued overhang of debt will have consequences for years to come. How will destroy this debt, optimists?

The US Jobless Claims number is a disappointment for those looking for claims to consistently fall. Instead, after troughing impressively in early July, the Claims have ticked up and stabilized in the mid 550's - still an alarming rate of job losses for an economy which already has the worst employment picture in perhaps 70 years (when measured honestly). This week's number is still worse than the very worst single weekly data points during the 2001 and 1990-1 recessions. Still, the key season for jobs comes around the end of September and early October. This will be the important area for judging whether we are turning the corner in the US employment market.

USDCHF (and he other CHF crosses for that matter) is one to watch here as it eases down to the bottom part of its recent range. EURCHF has also moved back to some of the bigger moving averages. Everyone knows what the SNB wants, the question being where they come in and make their presence felt with another round of intervention. Is that time just about nigh?

The Fight Between Inflation and Deflation is Over

By Porter Stansberry

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.
– Ludwig von Mises

For most of 2009, I've had a friendly disagreement with several colleagues who believe a big deflation will be the end result of the 2008 financial crisis.

I knew they were wrong. I knew inflation would become a problem sooner, rather than later. And in the past several months, I've been proven right.

The mortgage and banking collapse of 2007-2009 saw total collateral values collapse between $5 trillion and $10 trillion. The response from our politicians and central bankers was massive: the largest creation of new money in credit since the Civil War.

The Federal Reserve created roughly $2 trillion in additional credit and loaned it against all kinds of dubious collateral, things like Bear Stearns' mortgage book. (There's a handy and simple guide to estimating the Fed's credit quality. The more acronyms in the lending programs, the worse it gets.)

The Federal government responded with a record annual deficit of at least $1.8 trillion. In the second half of 2008, the outstanding federal debt grew by roughly a 40% annualized pace (24% for the entire year). Thus, in only a few months' time, the roots – the money and credit – underlying our economy expanded at a record pace.

In the second half of last year and the first quarter of 2009, the main question in the world's financial markets was: Can the world's government print enough money, fast enough, to forestall a deflationary collapse?

I knew it was no contest. There is no way for an economy to outrun a printing press. The Fed has the power to create an unlimited amount of money or credit and the power to inject that money into the economy in any way it sees fit.

Let's look at the numbers. Let's assume the total collateral damage of the banking crisis turns out to be $5 trillion. Yes, that's a huge hit – roughly half the output of our economy each year. It's the equivalent of sending every American household a bill for $50,000 – due immediately. However, in less than a year, the Feds have already created nearly $4 trillion in new money and credit. The hole in the system has already been plugged. It only took a few months.

The fight between inflation and deflation is over. Deflation was knocked out in the first round.

The big risk is what happens next. Having turned on the presses to save the day, who will have the political clout and the desire to shut them off? Barack Obama's budget calls for annual deficits in excess of $1 trillion for the next eight years. Thus, by the end of this year, not only will all of the damage from the mortgage collapse ($5 trillion) be replaced by new money and credit, there will be significant inflationary pressures in the economy.

The good news in our economy this year, so soon after such a major collapse, means we will certainly have a massive inflation during 2010 and 2011. There's no such thing as a free ride. Bailing out the banks will carry a heavy price for anyone who doesn't have the resources or the knowledge to escape the dollar.

How can you "escape"? First off, make sure you own plenty of gold bullion. I also recommend owning assets that will run higher in an inflationary environment, like vital transportation and energy assets. Also, own some good farmland. Food and land prices will go higher.

Yes, the news is grim... but if you own gold and strategic assets, you'll survive and prosper in the coming inflation.

Good investing,

Porter Stansberry

Better than U.S. Gold

Dear Reader,

Before you buy any more gold... please read this.

Our resident geologist says buying a unique type of Chinese Gold could outperform U.S. gold over the next few years by 100% or more.

It's an eye-opening report, which I've included below.

You'll also find instructions on how to take advantage of this situation.

Good Investing,

Brian Hunt
Editor in Chief.

Why Chinese Gold could
pay 100% MORE than U.S. Gold over the Next 2 Years

Don’t by another ounce of gold until you read this report.

In short: The Chinese government has created a secret new gold investment. The last time the gov’t did something like this, investors could have made 1,084%



Dear Reader,

China has gone crazy for Gold.

In April, for example, the government's Foreign-Exchange Agency announced the purchase of an additional 16 MILLION ounces for state coffers.

And just a few months earlier, National Geographic Magazine reported that for the first time China had surpassed the U.S. as a buyer of gold jewelry.

But here's the amazing thing few investors realize...

Behind the scenes, in a move that has gone almost completely unreported in the Western press, the Chinese government has created a gold investment that could dwarf the returns of gold bullion, ordinary gold stocks, or any other type of gold investment you've heard of before.

I wouldn't be surprised if you see gains of 1,000% or more.

I realize that may sound impossible, but consider...

This is not the first time Beijing leaders have secretly created such an opportunity:

In the late 1990s, the Chinese government created two similar investments. One (to help the local insurance industry) went up more than 625% in just a few years... the other (to aid the energy sector) has gone up about 1,084% over a similar period.

But this is the first time Chinese officials have intervened in this way in the gold markets—and I expect the result will be a windfall for savvy investors over the next few years.

After all, gold is one of the only "buy and hold" investments in the world right now. It is also the only investment in the world that has gone up EVERY YEAR for the past five years straight. And, remember, China remains the fastest-growingeconomy on the planet, with the wealthiest government on Earth.

The point is, if you are interested in an extremely lucrative way to own gold, right alongside the Chinese government, this is something you should consider.

I can just about guarantee you will not hear about this opportunity in any mainstream media publication. I heard about it only because of a contact in the industry, who met recently with officials in Beijing.

I expect the word will soon get out. But until then, you have an incredible opportunity. Let me show you what's going on...

The most reliable

way to see 500%+

There's been perhaps only one truly reliable investment trend over the past 20 years.

Bull markets have come and gone. Stocks have done well during some periods... and crashed during others. Same with bonds and real estate.

But there's one type of investment that has continued to reliably pay an absolute fortune.

In short: When the Chinese government creates a new investment vehicle, by spinning off part of a government entity, early investors have made a killing.

When the Chinese government realized they needed to improve their insurance industry, for example, they broke up state-run agencies, and created China Life Insurance, the only company with a national license. Investors have made 625% in the past five years.

When the Chinese government realized they needed more industrial supplies for manufacturing, they spun off state operations and created a firm called Chalco... which paid more than 2,100% over a six year period. They did the same with mobile phones, turning state interests into a public company that has provided 583% gains since becoming available.

And they did the same thing not too long ago in the oil industry...

First oil... now Gold

In the 1980s there basically was no "oil business" in China.

But the economy at the time was growing nearly 10% per year... and the government realized they had to become a major player.

The first thing they did was open up their own reserves for exploration. A government-created and partially government-owned business called China National Offshore Oil Corporation received an exclusive right to explore, develop, and produce oil with overseas partners. Investors have made more than 837% on this company since 2001.

Next, the Chinese government rewrote the energy rules, injected billions of dollars of capital, and in 1999 spun several new businesses out of the state-run China National Petroleum Corporation (CNPC).

** PetroChina, for example, was set up with the help of Goldman Sachs. Early investors in Petro China made 1,084% in about four years.

** Another spin-off from the state-run oil monopoly was a company called Sinopec. The government still owns 70%. And investors who got in early made about 960% over a seven-year period.

The point is, China woke up to the fact that they needed to own and control as much oil as possible, to grow the economy and become a world power.

And now...

What the Chinese government did for oil over the past decade... they are today doing for gold.

This is a huge development.


You see, most investors don't realize that China is now the world's largest gold producer (they passed South Africa last year).



China is also one of the few countries in the world where known gold reserves are increasing... not shrinking.

That's why I predict that investing in China's government-created and partnered gold companies will be one of the easiest ways to get rich over the next few years.

Let me explain how it's all going down...

China's Secret Solution

For essentially the past 50 years, no one was allowed to touch gold in China... except for the government.

But today, that is changing... and in a hurry...

In short, the Chinese government wants more gold.

They realize gold is one of the only buy-and-hold investments in the world right now. And they've got a lot of money to spend... nearly $2 Trillion according to a recent report in The New York Times.

So the Ministry of Land and Resources has completely rewritten the country's mining laws (known as the Minerals and Resources Law) to encourage local and foreign companies to explore for and produce more gold.

The government has also recently created the Shanghai Gold Exchange, to allow anyone to trade gold, on the open market, without government interference.

But most importantly for you and me, the government has quietly gotten behind a handful of publicly traded gold companies.



I believe these deals could make you extraordinary amounts of money over the next few years.

Let me show you the specifics, and why I believe this could make you so much money.

Remember, this is all happening incredibly fast in China—just like it did in the oil industry, where investors in Sinopec made 360% in 10 months... investors in PetroChina made 140% in less than year... and investors in China National made 102% in five months.

Twenty years ago, China produced an inconsequential amount of gold. Today, China is the #1 gold-producing nation in the world...

And these new government deals are poised to make some smart investors quite wealthy, very soon...

Investment #1: Gold Partnering
with the government

When it comes to gold mining in China, it's a whole different world than what we're used to in America...

There's no such thing as a NI43-101 disclosure form for mining companies, like we have here at home. And instead of a handful of giant companies running the industy, like we're used to, it's basically thousands of small operations scattered across the country.

In short, it's like the American Wild West.

That's why having the government on your side can make all the difference in the world...

For example, there are two very small gold mining companies with government connections that have a very good chance at making you several times your money in the next few years...

GOVERNMENT GOLD PARTNER #1: Recently, the Chinese government helped create, and took nearly a 50% ownership stake in, a very small gold mining company, in order to develop a handful of the country's most promising gold projects.

Already, the company has two producing properties, and exploration permits for two of the countries most gold-rich, untapped areas.

What makes this investment so appealing is that normally, when you deal with investments in China, there are certain political risks.

Will the government approve your projects? Will you be allowed to explore and develop the most potentially lucrative territories?

But for this small company, the political risks are virtually non-existent. After all, the company is nearly half-owned by the government, so obviously it will have huge advantages.

That's why I believe there's a very good chance this company will eventually become one of the world's "major" developers. And if that happens, you could easily make 2,000% on a small investment stake today.

We saw what happened when the Chinese government got behind several promising oil companies. Investors made more than 1,000% gains over a several-year period.

Well, now I believe there's a very good chance the same thing is going to happen to this company in the gold business.

Consider that right now, this company sells for well under $5 a share. It was formed just a few years ago... and now has several projects in production, and several more on the way.

What's incredible, is that this company has never been written about in the The Wall Street Journal, Barron's, or any other U.S. newspaper or magazine.

GOVERNMENT GOLD PARTNER #2: The second company I want to tell you about was formed by key members of China's National Non-Ferrous Metals Industry Corporation, a state-owned company.

In other words, several Chinese government employees got together, and used their power, influence, and connections, to create a company that is now the biggest foreign gold producer in China (they also have a local Chinese partner, which maintains an 18% interest).

It's no surprise, of course, that this company (created by former government employees) became the first local-foreign company to develop a gold mine in China. Or that they are the largest gold producer in China today... and control the country 2nd largest mine.

In short, there's no foreign company in China that can get projects done like this company can. I think it's absolutely a no brainer to own the biggest foreign producer in the world's #1 gold-mining country.

Keep in mind, this is still, relatively speaking, a tiny, tiny stock. It costs less than $7 a share... and is much less than 1/10th the size of Barrick Gold, the world's biggest gold producer.

I believe this tiny company with China operations could return many times your money over the next few years. And I'm not the only one who thinks so...

A Canadian firm just bought 20% of the outstanding shares. And I believe they are probably willing to pay at least 50% more than the current share price for the rest of this small Chinese miner.

A buyout could quickly double your investment. But the truth is, I'd rather hold this company for the next few years and potentially see 500% gains or more.

And this brings me to a third government opportunity I haven't even mentioned yet...

Better than gov't-owned gold?

I've described how the Chinese government is creating partnerships and spinoffs to develop the local gold industry.

Well... they are also spending a fortune to develop the local silver industry.

In a nutshell, the government is bringing in an experienced business to consolidate small mines, and to make them more efficient and profitable (while remaining partially government-owned).

And the good news for us is, there's basically one tiny silver mining company from Canada that has quietly become the government's favorite partner.

As I'll show you, this company is growing at a wildly fantastic pace. It is extremely profitable. And yes, it has the government as a direct partner on several of it's holdings.

In the Ying mining disctrict, for example, this small Canadian company has worked with the Chinese government to consolidate a group of mines, and has since turned them into a very profitable operation.

Today, this company produces tens of millions of ounces of silver every year—all in China. It is the cheapest mining company of it's type in the world, by far. And it has partnered with the Chinese government in a handful of projects.

On each of these projects, they pay NO taxes for the first two years.

And get this: Despite operating for just three years, this company is already the largest silver producer in China-- yet today it is still completely unknown.

I cannot say this strongly enough: You may never get another chance like this in your investment career... to buy such a cheap and wildly profitable mining company at the very beginning of what I see as a huge uptrend.

Overall, this company has grown its resources by an incredible 360% in roughly four years.

That's remarkable. And impossible to do in the U.S. or Canada... or any other developed country.

That's why China is the absolute best place in the world to grow a new mining company. Better still, we have a business that has no debt, almost $70 million in cash, and in large part because they are partnered with the government, has NEVER been turned down for a mining license.

My extremely conservative estimate for this company is a 100% gain before the end of this year (remember, it's still a very small company, and costs less than $5 a share). After that, the sky really is the limit.

I would not be surprised if this company ultimately becomes one of the most profitable stocks I recommend in my entire career.

Of course, I can't promise how much any of these companies are going to return over the next few years—there's no such thing as a guranteed investment.

But keep in mind: When mining companies get in early on new territories, they have a history of making investors an awful lot of money...

* A company called Rangold was instrumental in early mining operations in Mali. It has returned 634% in roughly the past five years.

* Keegan Resources got in early in Ghana, in West Africa, and has paid investors 489% in less than a year.

* A company called Buenaventure got in early in Peru's mining business... and has paid investors 1,293% over the past decade.

* And Barrick Gold... one of the companies that has made a business of being able to get in early in places like Peru, Argentina, and Tanzania, has returned a whopping 6,700% since going public.

I believe now is the perfect time to get in early on China's mining business, especially when you can have the government on your side.

And here's how I recommend you do it...

The New Secret of Getting
Rich in the Next 5 Years

My name is Matt Badiali. I'm a geologist.

I have a Masters of Science (M.Sc.) in geology and more than 13 years of industry and research experience.

You see, for years I wanted to take my expertise in resource companies and help people understand the business... and make some good money at the same time. So, a few years ago I joined a research team called Stansberry & Associates, which includes a PhD in finance, a former CitiGroup bond trader, several Johns Hopkins scientists, the former head of a California brokerage firm, and several Certified Financial Planners and hedge fund managers.

I learned their trade. And they learned a bit of mine.

And – for the past four years – I've leveraged my knowledge of the industry to help thousands of everyday Americans see huge gains by investing in precious metals and energy-related plays.

I've been studying China's gold (and silver) industry very closely for the past few years.

As I mentioned, China is the world's largest producer of gold in the world today, and the third-largest producer of Silver.

But this industry is still in its infancy.

When China's exploration and production techniques get better, China will dominate the world's gold production in an even bigger way. You have to remember that for basically the past 50 years, China had essentially NO precious metals industry.

But now the sleeping giant is waking up.

"China represents one of the world’s great remaining unexplored gold regions." – Greg Jones, geologist working in Southern China

There are several extraordinary investment opportunities in gold and silver right now.

I hope you take advantage of them.
Good Investing,
Matt Badiali
Editor, The S&A Resource Report